Consumers are still reigning in the spending

Consumers are still reigning in the spending

Disposable incomes in the UK have deteriorated in 2010, according to a new report, fuelling speculation that a focus on macroeconomic data is not giving us a true picture of consumer sentiment in the aftermath of recession.

Around a quarter of respondents to a Markit Economics survey in the UK recently said that their household finances have worsened in September. Only 7% of the 1,500 adults questioned reported an improvement in financial firepower.

Markit's monthly Household Finance Index, published today (27 September), reveals that September has seen the largest monthly decline in UK consumer spending power since August 2009. Its data shows that pressure has increased on consumers throughout 2010, despite the UK economy (GDP) expanding by 1.2% in the second quarter, the fastest pace of growth for nine years.

Something doesn't add up there. Can it be that depressed consumer sentiment slipped under the radar in the first half of 2010 as commentators obsessed over decimal-point, percentage rises in GDP?

For consumer products companies, economists' optimism at the West's apparent avoidance of a 1930s-style slump has perhaps disguised the true length of the difficult road ahead.

The UK's Bank of England held the pin to the proverbial balloon of recovery last week by signalling that it may need to restart its quantatitive easing policy to keep the economy ticking over. Renewed fears of an economic slowdown in Europe and the US, particularly in the last week, have forced a reassessment of the state of recovery in the West. 

"The higher cost of living, combined with stagnant income levels, contributed to another marked reduction in cash available to spend in September," said Markit in its report on the UK. In a double-whammy, it added that available cash was being used to pay off debt rather than buy products.

Almost all of the respondents to Markit's survey said they expect the cost of living to rise in the next 12 months. "The survey shines a light on the underlying causes of August’s unexpected drop in UK retail sales and, moreover, strikes a warning that the stage is set for further cutbacks in high street spending over the months ahead,” said Markit economist Tim Moore.

“September’s survey adds to a growing weight of evidence that UK households are braced for a renewed squeeze on their finances in the months ahead," he said. Public sector workers are generally more pessimistic, according to Markit's figures, because their sector is where the Government can wield its austerity axe more freely.

As Governments in many Western countries pursue austerity measures, Markit's pattern for the UK could easily be repeated elsewhere.

Some have already noted a similar disparity between headline figures and real-terms spending power in the US. Officially, the US exited recession in the summer of 2009. Its recovery appears to be confirmed by the Organisation for Economic Co-operation and Development's (OECD) prediction of a 2% GDP rise in the third quarter of 2010, followed by a 1.2% rise in the fourth quarter.

Yet, unemployment remains at around 10% in the US, having doubled from pre-crisis levels in early 2008, and has shown little sign of falling back. Last week, the Washington Post led with the headline: "For many of us, the recession lives on." Meanwhile, Warren Buffett, the veteran US investor known informally as the 'Oracle', declared the US to be "still in recession".

"I think perhaps what is needed is to be very cynical about the whole notion of when a recession starts and when it ends," the Washington Post quoted Wilhelmina Leigh, a senior economist, as saying. The Post quoted US Census Bureau figures that show the US poverty rate in 2009 hit its highest level for 15 years.

The prospect of high unemployment rates over the medium-term in many Western countries suggests that consumers will continue to feel the pinch. "Creating jobs has to be a top priority for governments,” said OECD secretary-general Angel Gurría at a press conference in July.

Any consumer products company that is not nervous probably should be. In drinks, we should not forget that Diageo, the largest distiller in the world, does not expect to increase net sales in Europe in the year to the end of June 2011. That, in itself, is telling.